MB 3102 INVESTMENT & CAPITAL ANALYSIS

WEEK 1 - 16 MAY 2019

1. Ms. Sloan has an opportunity to purchase any of the investments shown in the
following table. The purchase price, the amount of the single cash inflow, and its
year of receipt are given for each investment. Which purchase recommendations
would you make, assuming that she can earn 10% on his investments?

Investme Price Single Cash Year of

nt Inflow Receipt
A $ 18,000 $30,000 5
B 600 3,000 20

2. For each of the mixed streams of cash flows shown in the following table, determine
the future value at the end of the final year if deposits are made into an account
paying annual interest of 12%, assuming that no withdrawals are made during the
period and that the deposits are made:

Year Cash Flow Stream

1 $ 30,000
2 25,000
3 20,000
4 10,000
5 5,000

a. At the end of each year. (provide the scenario sketch)

b. At the beginning of each year. (provide the scenario sketch)
c. Which one have larger future value? Why

3. Consider the Future Value of investment data that Ms. Wright plan in the following
table. Determine the present value of each if she assumed have infinite investment
(she will give this to her child even after she dies and so forth)

Case Annual Amount Discount Rate

A $ 20,000 8%
B 100,000 10

4. Mrs. Thompson has $1,500 to invest. Her investment counselor suggests an

investment that pays no stated interest but will return $2,000 at the end of 3 years.
a. What annual rate of return will Mrs. Thompson earn with this investment?
b. She is considering another investment, of equal risk, that earns an annual return
of 8%. Which investment should she make, and why?

5. Mr. Wright wishes to determine how long it will take an initial deposit of $10,000 to
double. If He earns 10% annual interest on the deposit, how long will it take for him
to double his money?

6. Think that your parents have just had you as their first baby. If college is expected
to cost $150,000 per year in 18 years, how much should the couple begin
depositing annually at the end of each year to accumulate enough funds to pay the
 first year’s tuition at the beginning of the 19th year? Assume that they can earn a
6% annual rate of return on their investment.

7. You plan to retire in exactly 20 years. Your goal is to create a fund that will allow
you to receive $20,000 at the end of each year for the 30 years between retirement
and death (a psychic told you would die exactly 30 years after you retire). You know
that you will be able to earn 11% per year during the 30-year retirement period.
a. How large a fund will you need when you retire in 20 years to provide the 30-
year, $20,000 retirement annuity?
b. How much will you need today as a single amount to provide the fund calculated
in part a if you earn only 9% per year during the 20 years preceding retirement?
c. Now assume that you will earn 10% from now through the end of your
retirement. You want to make 20 end-of-year deposits into your retirement
account that will fund the 30-year stream of $20,000 annual annuity payments.
How large do your annual deposits have to be?

8. Joan Messineo borrowed $15,000 at a 14% annual rate of interest to be repaid over
3 years. The loan is amortized into three equal, annual, end-of-year payment.
a. Calculate the annual, end-of-year loan payment.
b. Prepare a loan amortization schedule showing the interest and principal
breakdown of each of the three loan payments.
c. Explain why the interest portion of each payment declines with the passage of
time.